Economic sanctions and anti-money laundering (“AML”) remain at the forefront of U.S. regulatory priorities. Indeed, in 2017, federal and state agencies imposed over $2.5 billion in penalties for sanctions/AML violations. And, despite its generally deregulatory agenda, the Trump administration has taken a rigorous approach in this area, particularly with respect to sanctions. At the state level, the New York Department of Financial Services (“DFS”) continues to take aggressive action on both the regulatory and enforcement fronts. This memorandum surveys major developments and trends in 2017 and provides an outlook for the year ahead. We also provide some practical advice for U.S. and non-U.S. companies seeking to strengthen compliance and mitigate risk in this challenging environment.

Last year witnessed a number of dramatic changes to the economic sanctions landscape. President Trump has continued the recent trend of using economic sanctions as a powerful national security and foreign policy tool, and Treasury Secretary Mnuchin estimates that he spends “probably over 50 percent” of his time on national security and sanctions issues.[1] In addition, the U.S. Congress asserted its authority on sanctions by passing the Countering America’s Adversaries Through Sanctions Act (“CAATSA”), which President Trump signed into law on August 2, 2017.[2] The administration’s and Congress’s actions have reshaped President Obama’s sanctions policies, significantly expanded the threat of secondary sanctions, and created new uncertainty and risks for U.S. and non-U.S. companies across industries.

The Trump administration has taken an aggressive stance towards North Korea, broadly threatening the imposition of secondary sanctions against non-U.S. persons conducting business involving North Korea. With respect to Iran, President Trump refused to certify that the suspension of sanctions under the Iran deal was in the U.S.’s national interest, and has threatened to reinstitute the sanctions relief granted pursuant to the deal. And, while the president this month extended waivers allowing the nuclear deal to remain intact, he threatened that this was for the “last time.” The Trump administration also imposed a new and novel sanctions program in response to events in Venezuela, implemented new Global Magnitsky Act sanctions targeting human rights abuses and government corruption, and re-imposed certain Cuba-related restrictions that had been relaxed under the Obama administration. Finally, 2017 saw the revocation of the longstanding U.S. trade embargo against Sudan. On the enforcement side, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) has continued to push the boundaries of its jurisdiction and intensified its focus on non-financial entities, as demonstrated by its largest ever settlement with Chinese Zhongxing Telecommunications Equipment Corporation (“ZTE”).

Enforcement of the Bank Secrecy Act/anti-money laundering (“BSA/AML”) laws—and their state analogues—remains a high priority for federal prosecutors and regulatory agencies, as well as the DFS. Prosecutors and regulators remain willing to impose substantial penalties, as when the Department of Justice (“DOJ”) and Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) reached a $586 million resolution with Western Union, and DFS issued major consent orders against non-U.S. banks. FinCEN also used its USA PATRIOT Act Section 311 authority to designate Bank of Dandong an institution of “primary money laundering concern” based on its alleged processing of North Korean transactions, thus cutting the institution off from the U.S. financial system. The Securities and Exchange Commission (“SEC”) also took several enforcement actions against broker/dealers that demonstrate its continued focus on AML enforcement.

On the policy side, last year FinCEN issued significant guidance, and DFS’s groundbreaking Part 504 regulation on sanctions/AML requirements went into effect. Congress has also focused on AML issues with the introduction of multiple bills designed to modernize and enhance the Bank Secrecy Act.[3] Finally, last year’s revelations of the Paradise Papers and the new revelations related to the “Russian Laundromat” money laundering scheme—like the release of the Panama Papers the year before—suggest that non-governmental actors, including investigative journalists and hackers, will continue to be an important force in spurring regulatory inquiries and prompting in-house reviews.

Recent Developments and Trends in Economic Sanctions and Anti-Money Laundering

Treasury’s Office of Foreign Assets Control

Last year saw sweeping changes to various sanctions programs administered by OFAC, particularly the North Korea, Iran, Russia/Ukraine, Cuba, Venezuela, and Sudan programs. These changes were effectuated through CAATSA, executive orders, regulatory amendments, and guidance documents. On the enforcement front, OFAC levied $120 million in civil penalties (including settlements) in 2017, up from $21 million in 2016, but down from the record-setting $1.2 billion levied in 2014. Notably, there was no blockbuster OFAC case against a major financial institution in 2017; instead, OFAC took eighteen enforcement actions against companies in a large range of industries, including the agency’s largest ever enforcement action against a non-financial institution—an approximately $100 million settlement with Chinese telecommunications giant ZTE.

As detailed in our prior memorandum,[4] CAATSA makes significant changes to the Russia/Ukraine, North Korea, and Iran-related sanctions programs. Controversially, the law also restricts President Trump’s ability to lift certain sanctions unilaterally, by including a congressional review mechanism that will allow Congress to potentially block the president from relaxing measures targeting Russia. While a number of the sanctions included in CAATSA are referred to as “mandatory,” it remains to be seen how certain provisions will be enforced by the Trump administration. As an initial matter, many of these provisions require the president to sanction individuals or entities only after he determines that they have engaged in certain activities, thus allowing the president to theoretically refrain from enforcing these sanctions by withholding certain determinations. Additionally, in signing CAATSA, President Trump released two signing statements, in which he noted his “concerns to Congress about the many ways [the bill] improperly encroaches on Executive power, disadvantages American companies, and hurts the interests of our European allies,” and his view that the “bill remains seriously flawed” because it “encroaches on the executive branch’s authority to negotiate” and because “the Congress included a number of clearly unconstitutional provisions.” President Trump stated that he would implement CAATSA’s restrictions “in a manner consistent with the president’s constitutional authority to conduct foreign relations.”[5]

OFAC continues to be led by Director John Smith, who was made Acting Director under the Obama administration. President Trump’s choice to be Treasury’s Under Secretary for Terrorism and Financial Intelligence, Sigal Mandelker, was confirmed in June 2017 and oversees both OFAC and FinCEN.

Changes in OFAC Sanctions Programs

North Korea. Primarily in response to North Korea’s ballistic missile testing and nuclear proliferation activities, a number of new North Korean sanctions measures were imposed in 2017. The sanctions program now prohibits virtually all dealings with North Korea that involve a U.S. nexus, and includes secondary sanctions authorities that threaten sanctions against non-U.S. entities engaged in North Korea-related trade that lacks a U.S. nexus. Due to the mounting tensions with North Korea, these sanctions continue to be a high priority for both Congress and the Trump administration.

CAATSA significantly expanded the scope of North Korea-related sanctions, including both the mandatory and discretionary sanctions that were put in place by the 2016 North Korea Sanctions Policy Enhancement Act (“NKSPEA”). And, on September 20, 2017, President Trump signed into law E.O. 13810,[6] which broadly expanded the authorization of secondary sanctions first enacted in CAATSA.[7] The secondary sanctions authorities now in place authorize the Secretary of the Treasury to sanction any non-U.S. entity determined to be engaged in prohibited conduct, which includes, among other things, knowingly conducting or facilitating any significant transaction in connection with trade with North Korea.[8] For example, E.O. 13810 authorizes sanctions against non-U.S. financial institutions that knowingly conduct or facilitate any significant transaction on behalf of a North Korean Specially Designated National (“SDN”) or in connection with trade with North Korea; available sanctions include being prohibited from opening correspondent or payable-through accounts in the United States or strict conditions on the maintenance of such accounts.[9] And such sanctions measures targeting non-U.S. financial institutions could be increased further if legislation currently pending in Congress—the Otto Warmbier Banking Restrictions Involving North Korea (“BRINK”)—becomes law.[10] The Trump administration has consistently expressed its intention to aggressively enforce North Korea related sanctions. Indeed, North Korea-related designations increased significantly in 2017, and included actions targeting non-North Korean persons and illicit networks operated through front companies, including companies based in China and Russia.[11]

The sophistication of the North Korean regime in using front companies for its illicit networks poses unique compliance challenges. For financial institutions in particular, undertaking more rigorous due diligence is an increasingly paramount concern. Among other things, the Trump administration has emphasized the need for Chinese banks to bolster their efforts at identifying and shutting down North Korea-related activity.[12] Marshall Billingslea, Treasury’s Assistant Secretary for Terrorist Financing, warned in testimony before Congress that “[f]inancial institutions in China, or elsewhere, that continue to process transactions on behalf of North Korea should take heed. [The U.S.] will continue to target North Korea’s illicit activity, regardless of location.”[13]

Iran. 2017 brought a sea change in the U.S. approach toward sanctions targeting Iran. While the Joint Comprehensive Plan of Action (“JCPOA”) remains in place, the Trump administration has taken an increasingly aggressive stance toward Iran sanctions policy, both by casting significant uncertainty on the viability of the JCPOA and by implementing multiple rounds of non-nuclear sanctions designations targeting Iran.

For example, as we have described in a previous memorandum, in October 2017, President Trump refused to certify that the suspension of sanctions under the JCPOA was “appropriate and proportionate” to measures taken by Iran with respect to terminating its illicit nuclear program.[14] Under the terms of the Iran Nuclear Agreement Review Act (“INARA”), this failure to certify triggered a 60-day period during which Congress was authorized—but not required—to consider the expedited re-imposition, or “snapback,” of the sanctions previously lifted by the Obama administration to fulfill the U.S.’s obligations under the JCPOA.

To date, Congress has not seriously considered snapback legislation, and the initial 60-day review period has already expired. However, even if Congress does not pass snapback legislation, the president retains unilateral authority to partially or entirely snap back sanctions in other ways. Indeed, when announcing his refusal to certify, President Trump stated that if Congress does not reimpose sanctions, he himself will act to “terminate the JCPOA.” The president could achieve this outcome by simply declining to continue to waive the suspension of certain sanctions, as required by the JCPOA. Although President Trump extended the waivers in January 2018, he noted that it was for the “last time,” and that he was doing so “only in order to secure our European allies’ agreement to fix the terrible flaws of the [JCPOA]. This is a last chance. In the absence of such an agreement, the United States will not again waive sanctions . . . And if at any time I judge that such an agreement is not within reach, I will withdraw from the deal immediately.”[15] The next waiver deadline is in May 2018. The president could also re-designate all or some of the Iranian persons whose sanctioned status was lifted pursuant to the JCPOA, or otherwise broadly re-impose previously lifted nuclear-related sanctions on new, “non-nuclear” grounds. He could also direct OFAC to rescind licenses for certain activities involving Iran (such as commercial aviation-related transactions) issued under the Obama administration.

In addition to the de-certification announcement regarding the JCPOA, the Trump administration has also increased sanctions pressure targeting Iran on the non-nuclear front. As OFAC Director John Smith testified before Congress in late November 2017: “Since this Administration took office, OFAC has issued eight tranches of sanctions, designating 78 targets in Iran, China, Germany, Lebanon, and Ukraine in connection with the IRGC [Islamic Revolutionary Guard Corps] and Iran’s ballistic missile program, support for terrorism, human rights abuses, cyber-attacks, transnational criminal activity, and other destabilizing regional activities.”[16] The Trump administration has also focused pressure on the IRGC: in October 2017, President Trump announced the Treasury Department’s designation of the IRGC in its entirety as a terrorist organization, pursuant to Executive Order 13224,[17] as well as the statutory requirement imposed by CAATSA.[18] The IRGC designation was coupled with warnings from the Treasury Department to avoid dealing with the IRGC, with Director Smith recently testifying: “As we have urged the private sector to recognize that the IRGC permeates much of the Iranian economy, we have emphasized that those who transact with IRGC-controlled entities do so at their own risk.”[19]

During this period of increased uncertainty, companies currently conducting Iran-related business—or contemplating new such business—may want to seriously consider the risk that the prior U.S. sanctions will snapback into place. And, even if the JCPOA remains in place, companies involved in Iran-related business should ensure they are conducting enhanced due diligence to avoid transactions with the IRGC or other designated entities, as OFAC will likely aggressively pursue violations of the current non-nuclear sanctions regime.

Last year also saw increased activity involving state-level sanctions measures. For example, in May 2017, Texas Governor Greg Abbott signed two bills that expand divestiture and contracting sanctions involving Iran, the Terror State Divestiture Act[20] and the Terror State Contracting Act (the latter also added sanctions involving Sudan and Foreign Terrorist Organizations).[21]

Russia/Ukraine Sanctions. Following the election of President Trump, some predicted a rollback of U.S. sanctions targeting Russia. Instead, in August 2017, Congress (through CAATSA) strengthened and expanded sectoral sanctions targeting Russia, and threatened the imposition of new and expanded secondary sanctions. Given the significant changes in this area, we have provided an overview of the current state of Russia/Ukraine sanctions in a recent memorandum.[22]

CAATSA’s amendments to the sectoral sanctions program have presented increased compliance challenges for U.S. entities providing financing or goods and services to designated Russian entities, as well as for non-U.S. entities engaging in transactions involving such activity and a U.S. nexus. For example, amended Directives 1 and 2 imposed stricter limitations on the provision of goods and services on credit from U.S. suppliers to designated Russian entities. In addition, effective January 29, 2018, amended Directive 4 will cover deepwater, Artic offshore, and shale projects worldwide in which a Sectoral Sanctions Identification (“SSI”) entity subject to Directive 4 holds a 33% or greater ownership interest. The amendments to Directive 4 do not change the applicability of OFAC’s 50 percent rule in the Directive 4 context (the 50% rule continues to apply when determining SSI ownership of entities, while the 33% rule applies to SSI ownership interest in projects). Nevertheless, the “33-percent rule” will pose additional compliance challenges for companies doing business with Russian entities in support of exploration or production for new deepwater, Arctic offshore, or shale projects worldwide.

CAATSA also includes a series of new and expanded secondary sanctions authorities that seek to discourage non-U.S. persons (including entities and individuals that are based outside of Russia) from knowingly engaging in certain Russia-related conduct, including certain transactions involving: Russian deepwater, artic offshore or shale oil projects; privatization of Russian state-owned assets; and Russia’s intelligence and defense sectors, among others. While the conventional wisdom is that President Trump will likely not be energetic in implementing these provisions, pressure from Congress and/or developments in geopolitics or domestic politics may lead the Trump administration to take tougher measures towards Russia. As a result, non-U.S. companies should meaningfully consider the risk of secondary sanctions in evaluating their ongoing and future business dealings in Russia.

Cuba. On June 16, 2017, President Trump announced that “effective immediately, I am canceling the last administration’s completely one-sided deal with Cuba.”[23] That same day, the president issued a National Security Presidential Memorandum entitled “Strengthening the Policy of the United States Toward Cuba.” As part of this directive, the administration barred transactions connected with Cuban military, intelligence, and security agencies and personnel. In addition, the directive aimed to reduce financial support for Cuba’s tourism sector by limiting the circumstances in which Americans can travel to Cuba and spend money in the country while visiting.[24] The Treasury, Commerce, and State Departments published new regulations (effective November 9, 2017) to implement the changes President Trump announced in his June memorandum.[25] In particular, the State Department published an updated list of entities subject to prohibitions on direct financial transactions.[26] Additionally, OFAC made conforming edits to its regulations to restrict transactions involving the entities on the updated State Department list.[27]

Despite these changes, most of the Obama administration’s actions to ease Cuban sanctions and export controls remain intact. For example, the authorization for the processing of “U-turn” payments through the U.S. financial system and the ability of certain Cuban nationals to maintain U.S. bank accounts remain unchanged.[28]

Venezuela. In response to ongoing human rights abuses in Venezuela in connection with its crackdown on anti-government protestors, the Trump administration has significantly increased sanctions pressure targeting the Venezuelan government. In 2017, the Trump administration designated more than 40 Venezuelan parties for, among other reasons, “undermining democratic processes, engaging in media censorship, or otherwise supporting [Venezuelan President Nicolas] Maduro’s dictatorial regime.”[29] Most prominently, in July 2017, the Trump administration designated President Nicolas Maduro and officials linked to his regime.[30] Also designated in July were current and former officials of Venezuelan state-owned oil company Petroleos de Venezuela, S.A. (“PdVSA”), which has been repeatedly linked to Venezuelan government corruption.

In August 2017, President Trump issued a new Venezuela-related executive order that introduced novel and complex sanctions measures.[31] The new round of sanctions prohibit U.S. persons from dealing in bonds previously issued by the government of Venezuela and in new Venezuelan debt with a maturity of more than 30 days, or 90 days where PdVSA is the debtor.[32] And, in November 2017, following October elections that OFAC characterized as a “sham” and “neither free nor fair,”[33] OFAC designated an additional ten current and former government officials “associated with undermining electoral processes, media censorship, or corruption in government-administered food programs in Venezuela.”[34]

OFAC has also targeted senior Venezuelan officials using its counter-narcotics authorities. In February 2017, OFAC designated Venezuelan Vice President Tareck Zaidan El Aissami Maddah for drug trafficking and also designated or identified as blocked the property of 13 companies involved in El Aissami’s global narcotics network, including companies in Venezuela, the British Virgin Islands, Panama, the United Kingdom, and the United States. Given El Aissami’s status as Vice President, OFAC issued guidance regarding business with the Government of Venezuela, stating that while the “designation of an official of the Government of Venezuela does not mean that the government itself is also blocked . . . S. persons should be cautious in dealings with the government to ensure that they are not engaged in transactions or dealings, directly or indirectly, with an SDN.”[35]

Sudan. In January 2017, the Obama administration announced the revocation of the bulk of the Sudanese Sanctions Regulations (“SSR”), subject to a six-month review period.[36] After briefly extending the review period (through October 2017),[37] President Trump finalized the revocation on October 12, 2017.[38] Accordingly, U.S. persons are no longer prohibited from engaging in transactions previously prohibited by the SSR. An OFAC license is still necessary, however, for certain exports and reexports of agricultural commodities, medicine, and medical devices to Sudan. In addition, the Department of Commerce still requires licenses to export or reexport commodities, software, and technology on the Commerce Control List (“CCL”).[39] Finally, the revocation does not affect OFAC designations of any Sudanese persons pursuant to other authorities still in place.

Global Magnitsky Sanctions. On December 20, 2017, President Trump issued an executive order implementing the Global Magnitsky Human Rights Accountability Act, which authorized the imposition of sanctions against human rights abusers and those who facilitate government corruption.[40] OFAC simultaneously added 52 entities and individuals to the SDN list pursuant to the new executive order. These designations include individuals who have been connected to DOJ and SEC Foreign Corrupt Practices Act enforcement actions. The new sanctions regime is remarkably broad and allows for the designation of any person determined to be: (1) responsible for or complicit in serious human rights abuses; (2) a current or former government official (or a person acting for or on behalf of such an official) responsible for or complicit in, corruption or bribery; (3) a current or former government official (or a person acting for or on behalf of such an official) who is responsible for or complicit in the facilitation of the transfer of the proceeds of corruption; or (4) those who have attempted to engage in such activities or materially assisted, sponsored, or provided support for such individuals, entities, or activities. The executive order does not define key terms, such as “corruption.” While the effect of the new executive order will depend in large part on its implementation, it has the potential to serve as a powerful new tool in combating foreign corruption and human rights violations.

[5] Statement by President Donald J. Trump on the Signing of H.R. 3364; Statement by President Donald J. Trump on Signing the “Countering America’s Adversaries Through Sanctions Act” (Aug. 2, 2017), available here and here.

[7] On October 20, 2017, Present Trump announced the designation of North Korea as a state sponsor of terrorism, triggering additional sanctions authorities. From a compliance perspective, this designation was largely symbolic, as it is mostly duplicative of other sanctions authorities already in place. See Jeff Mason, Trump Declares North Korea State Sponsor of Terrorism, Triggers Sanctions, Reuters (Nov. 20, 2017), available here.

[10] On November 7, 2017, the Senate Banking Committee unanimously approved the BRINK Act of 2017, which would enact mandatory secondary sanctions against non-U.S. financial institutions that provide financial services to designated persons. The BRINK Act is expressly modeled on the Iran secondary sanctions with the intention of specifically targeting non-U.S. financial institutions, and it is currently pending before the full Senate. See Patricia Zengerle, U.S. Senate Panel Targets Chinese Banks with North Korea Sanctions, Reuters (Nov. 7, 2017), available here; S. 1591, To Impose Sanctions with respect to the Democratic People’s Republic of Korea, and for other purposes (July 19, 2017), available here; Sens. Chris Van Hollen & Pat Toomey, CNN, The Act that Gets Tough on North Korea (Nov. 7, 2017), available here.

[13] U.S. Dep’t of Treasury, Press Release, Testimony of Assistant Sec’y Marshall S. Billingslea before House Foreign Affairs Comm. On Threat Posed by North Korea (Sept. 12, 2017), available here.

[14] The president’s decertification announcement came two days before a periodic deadline under INARA to certify Iran’s compliance with the JCPOA. Among other requirements, INARA requires the president to certify every 90 days that four conditions have been met: (1) Iran “is transparently, verifiably, and fully implementing the agreement”; (2) Iran “has not committed a material breach with respect to the agreement or, if Iran has committed a material breach, Iran has cured the material breach”; (3) Iran “has not taken any action, including covert activities, that could significantly advance its nuclear weapons program”; and (4) “suspension of sanctions related to Iran pursuant to the agreement is (I) appropriate and proportionate to measures taken by Iran with respect to terminating its illicit nuclear program and (II) vital to the national security interests of the United States.” See Paul, Weiss memorandum, President Trump Announces Intent to “De-Certify” Iran’s Compliance with the Joint Comprehensive Plan of Action (Oct. 13, 2017), available here.

[15] The White House, Press Release, Statement by the President on the Iran Nuclear Deal (Jan. 12, 2018), available here.

[16] U.S. Dep’t of Treasury, Press Release, Testimony of John E. Smith Before the House Committee on Financial Services Subcommittee on Monetary Policy and Trade Thursday, November 30, 2017 (Nov. 30, 2017), available here.

[17] Executive Order 13224 prohibits transactions with (and blocks the assets of) persons who commit or threaten to commit international terrorism.

[18] We describe CAATSA’s Iran-related provisions in a previous Paul, Weiss memorandum, availablehere. While CAATSA directed the president to designate the IRGC as a terrorist organization by October 30, 2017, it also included waiver authority allowing the president to refuse to do so. From a compliance perspective, most of CAATSA’s Iran-related provisions are not new, but rather codify certain authorities already used in some form by the Treasury Department to target Iran outside the scope of the JCPOA.

[23]See The White House, Press Release, Remarks by President Trump on the Policy of the United States Towards Cuba (June 16, 2017), available here.

[24]See The White House, Press Release, National Security Memorandum on Strengthening the Policy of the United States Toward Cuba (June 16, 2017), available here.

[25]See U.S. Department of Treasury, Press Release, Treasury, Commerce, and State Implement Changes to the Cuba Sanctions Rules, Amendments Implement President Trump’s June 2017 National Security Presidential Memorandum (NSPM) Strengthening the Policy of the United States Toward Cuba (Nov. 9, 2017), available here.

[26]See U.S. Department of State, List of Restricted Entities and Subentities Associated with Cuba as of November 9, 2017 (Nov. 8, 2017), available here.

[30]See U.S. Dep’t of the Treasury, Treasury Sanctions 13 Current and Former Senior Officials of the Government of Venezuela (July 26, 2017), availablehere; U.S. Dep’t of the Treasury, Press Release, Treasury Sanctions the President of Venezuela (July 31, 2017), availablehere.

[32] OFAC also published four Venezuela-related general licenses to, among other things, allow companies to wind down existing contracts impacted by the executive order and to allow certain humanitarian imports.

[33] U.S. Dep’t of the Treasury, Press Release, Testimony of John E. Smith Director of the Office of Foreign Assets Control U.S. Dep’t of the Treasury House Committee on Financial Services Subcommittee on Monetary Policy and Trade Thursday, November 30, 2017 (Nov. 30, 2017), available here.

This post comes to us from Paul, Weiss, Rifkind, Wharton & Garrison LLP. It is based on the firm’s memorandum, “Economic Sanctions and Anti-Money Laundering Developments: 2017 Year in Review,” dated January 23, 2018, and available here.